As a lawyer specializing in business and employment law, one of the questions I frequently get asked is about how to properly draft an executive compensation agreement. These agreements are essential for clearly outlining the terms of employment for top executives in a company, including their responsibilities, compensation, benefits, and any equity or vesting provisions. It’s important to carefully consider all of these terms in order to ensure a fair and mutually beneficial relationship between the company and the executive.
To help business owners and HR professionals navigate this process, I’ve put together a free Executive Compensation Agreement template that can be used as a starting point for drafting your own agreement. This template covers all of the key components of an executive compensation agreement, including position and responsibilities, compensation and benefits, equity and vesting, vacation and sick days, work product ownership, termination of employment, confidentiality and non-solicitation, and governing law. In this blog post, I’ll be discussing each of these components in more detail and explaining why they’re important to include in your executive compensation agreement. So, make sure to keep reading and don’t forget to download the free template at the end of the post!
Position and Responsibilities
One of the most important aspects of an executive compensation agreement is outlining the specific duties and responsibilities of the executive in question. This helps to ensure that both the company and the executive have a clear understanding of what is expected of the executive in their role. In the provided template, this is covered in Section 1, which outlines a number of general responsibilities for the Chief Operating Officer (COO), including developing and implementing operating policies and procedures, managing budgets and financial planning, ensuring compliance with laws and regulations, leading and managing teams of employees, identifying and implementing process improvements, and partnering with the CEO to develop and execute the company’s strategic plan.
It’s important to be as specific as possible in outlining the responsibilities of the executive in the agreement, as this helps to avoid any misunderstandings or confusion down the line. It’s also a good idea to include language stating that the executive is expected to perform their duties to the best of their ability and in accordance with the company’s policies and procedures.
Compensation and Benefits
The next component of an executive compensation agreement is outlining the executive’s base salary and any potential bonus structure. In the provided template, this is covered in Section 2a, which states that the COO will receive a base salary of $60,000 per year, paid in biweekly installments, and will be eligible for a profit share bonus of 10% at the end of the year based on the company’s profits for that year.
It’s important to be as transparent as possible when it comes to compensation, as this helps to build trust and ensure that the executive feels fairly compensated for their work. It’s also a good idea to include language outlining any additional benefits that the executive will receive, such as gym memberships or training allowances. In the provided template, these benefits are outlined in Section 4, which includes gym pass reimbursement, business travel expenses, and a training and education allowance.
Equity and Vesting
Another common component of executive compensation agreements is the inclusion of equity or stock options as part of the overall compensation package. This can be a powerful motivator for executives, as it gives them a stake in the company’s success and aligns their interests with those of the company’s shareholders. In the provided template, this is covered in Section 3, which outlines a vesting schedule for 4% equity in the company for the COO.
It’s important to clearly outline the vesting schedule and any potential cliffs in the agreement in order to avoid any misunderstandings or confusion. In the provided template, the vesting schedule is set at 25% of the shares vesting on the first anniversary of the agreement, with 1/36th of the shares vesting each month thereafter subject to the COO’s continued employment.
Vacation and Sick Days
Another key component of an executive compensation agreement is outlining the vacation and sick leave policies for the executive. This helps to ensure that the executive has the time they need to rest and recharge, while also setting clear expectations for when they
Work Product Ownership
An important aspect of executive compensation agreements is ensuring that the company has the right to any work product that is produced by the executive in the course of their employment. This includes any inventions, products, designs, documents, or other materials that the executive creates or contributes to while working for the company. In the provided template, this is covered in Section 6, which includes provisions for disclosure and assignment of work product.
It’s important to include language requiring the executive to disclose any work product to the company in writing, as well as language assigning ownership of that work product to the company. This helps to ensure that the company has the rights it needs to use and commercialize any work product that is produced by the executive.
Termination of Employment
No one likes to think about the possibility of their employment being terminated, but it’s important to have clear provisions outlining the terms for termination in an executive compensation agreement. This helps to ensure that both the company and the executive have a clear understanding of what will happen in the event of termination, and can help to avoid disputes down the line. In the provided template, this is covered in Section 7, which outlines the circumstances under which the COO’s employment may be terminated.
It’s important to include language outlining the notice period for termination by either the company or the executive, as well as provisions for termination for cause. It’s also a good idea to include language stating that the executive is expected to fulfill their duties and responsibilities during the notice period and use their best efforts to train and support their replacement, if any.
Confidentiality and Non-Solicitation
In order to protect the company’s proprietary information and business interests, it’s important to include confidentiality and non-solicitation provisions in an executive compensation agreement. These provisions help to ensure that the executive does not disclose the company’s confidential information or attempt to solicit the company’s employees, customers, or clients after their employment ends. In the provided template, these provisions are covered in Section 8 and 9, respectively.
It’s important to clearly outline the scope and duration of these provisions in the agreement, as well as any exceptions that may apply. For example, the executive may be allowed to disclose certain information if required by law or legal proceedings.
Finally, it’s important to specify the governing law for an executive compensation agreement in order to determine which state’s laws will apply in the event of a dispute. In the provided template, this is covered in Section 10, which states that the agreement will be governed by the laws of the state of California.
It’s important to carefully consider which state’s laws to choose as the governing law, as the laws of different states can vary significantly. For example, some states
In conclusion, an executive compensation agreement is an essential tool for clearly outlining the terms of employment for top executives in a company. It’s important to carefully consider all of the key components of the agreement, including position and responsibilities, compensation and benefits, equity and vesting, vacation and sick days, work product ownership, termination of employment, confidentiality and non-solicitation, and governing law. By including all of these provisions in the agreement, you can ensure a fair and mutually beneficial relationship between the company and the executive and avoid any misunderstandings or disputes down the line.
Executive Compensation Agreement Template for a COO
EXECUTIVE COMPENSATION AGREEMENT
This Agreement is made this ____ day of _____________, 2023 (the “Effective Date”), by and between ________________ (the “Company”), of ___[address]_____________________________, and, _______[Name]_________ (the “COO”), of ___[address]_____________________________. The [Name] accepts employment as the Chief Operating Officer of the Company on the following terms and conditions:
- POSITION AND RESPONSIBILITIES. The COO will be responsible for overseeing the daily operations of the Company, including but not limited to:
- Developing and implementing operating policies and procedures.
- Managing budgets and financial planning.
- Ensuring compliance with laws and regulations.
- Leading and managing teams of employees.
- Identifying and implementing process improvements.
- Partnering with the CEO to develop and execute the Company’s strategic plan.
- COMPENSATION; EXPENSES
- Base Salary. The COO will receive a base salary of $________ per year, paid in biweekly installments. In addition to the base salary, the Employee will be eligible for a profit share bonus of 10% at the end of the year, based on the Company’s profits for that year.
- Expenses. The COO is authorized to incur reasonable business expenses in the performance of the COO’s administrative duties under this Agreement. The Company will reimburse the COO from time to time for all such business expenses, provided that the COO presents to the Company receipts that state sufficient information to establish the amount, date, place, and essential character of each expenditure. The COO must receive a prior permission from the Board of Directors of the Company prior to expending out of pocket any amount exceeding $_______.
- EQUITY. Subject to COO continuing to be an employee of the Company, he will be granted 4% equity in the Company vesting as follows: twenty-five percent (25%) of the shares subject to the grant shall vest on the first anniversary of the Agreement, and one thirty-sixth (1/36th) of the shares shall vest each month thereafter, subject to COO’s continued employment through each such date.
- BENEFITS. The Company will provide the following benefits to the Employee:
- Gym pass reimbursement up to $50 per month.
- Business travel expenses, including airfare, hotel, and meals, will be covered by the Company.
- A training and education allowance of $1,500 per year to be used for professional development opportunities.
- A 401k plan with a 5% match, subject to the terms and conditions of the plan as administered by the Company’s HR management company.
- VACATION AND SICK DAYS
- The COO shall be entitled to twenty days paid vacation per year, which, to the extent they are not used at the end of the contract term, a maximum of ten days may be carried over at the end of the contract term.
- The COO shall be entitled to ten days paid sick leave per annum. Upon termination of employment, the COO shall be entitled to a maximum of ten days paid sick leave.
- WORK PRODUCT OWNERSHIP
- Disclosure. COO will, as an integral part of the performance of services, disclose in writing to the Company all inventions, products, designs, drawings, notes, documents, information, documentation, improvements, works of authorship, processes, techniques, know-how, algorithms, specifications, hardware, circuits, computer programs, databases, user interfaces, encoding techniques, and other materials of any kind that COO may make, conceive, develop or reduce to practice, alone or jointly with others, in connection with performing services or that result from or that are related to such services, whether or not they are eligible for patent, copyright, mask work, trade secret, trademark or other legal protection (collectively, “Work Product”).
- Ownership. The COO agrees that all COO Work Product is and will be the sole and exclusive property of the Company. The COO hereby irrevocably transfers and assigns to the Company, and agrees to irrevocably transfer and assign to the Company, all right, title and interest in and to the COO Work Product, including all worldwide patent rights (including patent applications and disclosures), copyright rights, mask work rights, trade secret rights, know-how, and any and all other intellectual property or proprietary rights (collectively, “Intellectual Property Rights”) therein. At the Company’s request and expense, during and after the term of this Agreement, the COO will assist and cooperate with the Company in all respects, and will execute documents, and will take such further acts reasonably requested by the Company to enable the Company to acquire, transfer, maintain, perfect and enforce its Intellectual Property Rights and other legal protections for the COO Work Product. The COO hereby appoints the officers of the Company as the COO’s attorney-in-fact to execute documents on behalf of the COO for this limited purpose.
- Related Rights. To the extent that the COO owns or controls (presently or in the future) any patent rights, copyright rights, mask work rights, trade secret rights, or any other intellectual property or proprietary rights that may block or interfere with, or may otherwise be required for, the exercise by the Company of the rights assigned to the Company under this Agreement (collectively, “Related Rights”), the COO hereby grants or will cause to be granted to the Company a non-exclusive, royalty-free, irrevocable, perpetual, transferable, worldwide license (with the right to sublicense) to make, have made, use, offer to sell, sell, import, copy, modify, create derivative works based upon, distribute, sublicense, display, perform and transmit any products, software, hardware, methods or materials of any kind that are covered by such Related Rights, to the extent necessary to enable the Company to exercise all of the rights assigned to the Company under this Agreement.
- MONITORING. The COO shall give Company, through its authorized representatives, access to and the right to examine any or all pertinent records or other written materials maintained by COO and related to the business of the Company or this Agreement. COO shall also give Company the right at all reasonable times to inspect or otherwise evaluate the work performed or being performed hereunder by COO.
- PERFORMANCE REVIEWS. The COO will be provided with a performance appraisal at least once every six months and said appraisal will be reviewed at which time all aspects of the assessment can be fully discussed.
- TERM OF EMPLOYMENT. The term of the COO’s employment shall be four years, beginning on the Effective Date above (the “Term”), unless his employment is sooner terminated pursuant to the provisions of this Agreement.
- TERMINATION. The COO’s employment with the Company may be terminated, prior to the expiration of the term of this Employment Agreement, in accordance with any of the following provisions:
- Termination by the COO. The COO may terminate their employment at any time during the course of this Agreement by giving _______ [weeks]’ notice in writing to the President of the Company. During the notice period, the COO must fulfill all of their duties and responsibilities set forth above and use their best efforts to train and support their replacement, if any. Failure to comply with this requirement may result in Termination for Cause described below, but otherwise the COO’s salary and benefits will remain unchanged during the notification period.
- Termination by the Company Without Cause. The Company may terminate the COO’s employment at any time during the course of this Agreement by giving _____ [weeks]’ notice in writing to the COO. During the notice period, the COO must fulfill all of their duties and responsibilities set forth above and use their best efforts to train and support their replacement, if any. Failure of the COO to comply with this requirement may result in Termination for Cause described below, but otherwise the COO’s salary and benefits will remain unchanged during the notification period. The Company, may, in its sole discretion, give the COO severance pay in the amount of the remaining notice period in lieu of actual employment, and nothing herein shall require the Company to maintain the COO in active employment for the duration of the notice period.
- Termination by the Company for Cause. The Company may, at any time and without notice, terminate the COO for “cause”. Termination by the Company of the COO for “cause” shall include but not be limited to termination based on any of the following grounds: (a) failure to perform the duties of the COO’s position in a satisfactory manner; (b) fraud, misappropriation, embezzlement or acts of similar dishonesty; (c) conviction of a felony involving moral turpitude; (d) illegal use of drugs or excessive use of alcohol in the workplace; (e) intentional and willful misconduct that may subject the Company to criminal or civil liability; (f) breach of the COO’s duty of loyalty, including the diversion or usurpation of corporate opportunities properly belonging to the Company; (g) willful disregard of Company policies and procedures; (h) breach of any of the material terms of this Agreement; and (i) insubordination or deliberate refusal to follow the instructions of the President of the Company.
- Termination by Death or Disability. The COO’s employment and rights to compensation under this Employment Agreement shall terminate if the COO is unable to perform the duties of their position due to death or disability lasting more than 90 days, and the COO’s heirs, beneficiaries, successors, or assigns shall not be entitled to any of the compensation or benefits to which the COO is entitled under this Agreement, except: (a) to the extent specifically provided in this Employment Agreement (b) to the extent required by law; or (c) to the extent that such benefit plans or policies under which the COO is covered provide a benefit to the COO’s heirs, beneficiaries, successors, or assigns.
- INDEPENDENT LEGAL ADVICE. The COO acknowledges that the Employer has provided the COO with a reasonable opportunity to obtain independent legal advice with respect to this agreement, and that either: (a) The COO has had such independent legal advice prior to executing this agreement, or; (b) The COO has willingly chosen not to obtain such advice and to execute this agreement without having obtained such advice.
- NON-DISCLOSURE. The COO understands that in the course of their employment with the Company, they may have access to confidential information, including but not limited to business plans, financial data, customer lists, and proprietary technology. The COO agrees to keep all such confidential information strictly confidential and not to disclose it to any third party without the prior written consent of the Company. The COO further agrees that they will not use any confidential information for their own benefit or the benefit of any other person or entity. The COO understands that this obligation of confidentiality will continue after the termination of their employment with the Company.
- The COO agrees that during their employment with the Company and for a period of one year after the termination of their employment, they will not directly or indirectly solicit, divert, or attempt to solicit or divert, any customers or clients of the Company for their own benefit or the benefit of any other person or entity.
- The COO also agrees that during their employment with the Company and for a period of one year after the termination of their employment, they will not directly or indirectly solicit, hire, or attempt to solicit or hire any employees of the Company for their own benefit or the benefit of any other person or entity.
- The COO understands that this non-solicitation obligation is necessary to protect the legitimate business interests of the Company and that any breach of this obligation will cause irreparable harm to the Company. The COO agrees that the Company will be entitled to seek injunctive relief to enforce this non-solicitation obligation, in addition to any other remedies available at law or equity.
- NON-COMPETE. The COO agrees not to directly or indirectly compete with the business of the Company and its successors and assigns during the employment period. “Business of the Company” shall mean _____________________________.
- PROPERTY RIGHTS OF PARTIES
- All files, records, documents, drawings, specifications, equipment and similar items relating to the business of the Company, whether or not prepared by the COO, shall remain the exclusive property of Company.
- Company shall have the right to use, copyright, reproduce, publish, or distribute any and all materials created by COO under the name of Company, without obtaining permission from COO and without expense and charge.
- On the termination of employment or whenever requested by Company, COO shall immediately deliver to the Company all property in the COO’s possession or under the COO’s control belonging to the Company (including but not limited to all accounting records and files). Such property shall be returned in good condition, ordinary wear and tear excepted.
- GENERAL PROVISIONS
- The COO shall comply with all applicable laws, ordinances, codes, and regulations.
- Neither this Agreement nor any duties or obligations under it shall be assignable by COO without the prior written consent of Company.
- This Agreement may not be amended except by a writing executed by all of the parties hereto.
- Subject to the provisions regarding assignment, this Agreement shall be binding on and inure to the benefit of the parties to it and their respective heirs, executors, administrators, legal representatives, successors, and assigns.
- The validity of this Agreement and any of its terms or provisions, as well as the rights and duties of the parties, shall be governed by the laws of the State of Oregon.
- In the event that any or more of the provisions contained in this Agreement shall for any reason be held to be invalid, illegal, or unenforceable in any respect, such invalidity, illegality, or unenforceability shall not affect any other provisions, and the Agreement shall be construed as if such invalid, illegal, or unenforceable provision had never been contained in it.
IN WITNESS WHEREOF, the Parties have executed this Agreement as of the Effective Date.
|COMPANY: By: _______________________________ Name/Title: _________________________ Date:______________________________||COO: By: _________________________________ Name: _______________________________ Date: ________________________________|